Chicago had its credit rating cut to junk by Moody’s Investors Service after the Illinois Supreme Court’s rejection of a state pension-overhaul plan reduced the city’s options for fixing its own underfunded system.

The two-level downgrade to Ba1 affects $8.1 billion of general obligations, which were already the lowest-rated among the 90 biggest U.S. cities, excluding Detroit. The outlook is still negative. Moody’s has dropped the city seven levels since July 2013.

The reduction to the highest level of junk “incorporates expected growth in the city’s highly elevated unfunded pension liabilities,” Moody’s said Tuesday. After the May 8 court ruling, “we believe that the city’s options for curbing growth in its own unfunded pension liabilities have narrowed considerably.”

The deterioration in the credit standing of the third-most-populous U.S. city underscores how pension promises are squeezing the finances of states and localities nationwide. Moody’s downgrade compounds Chicago’s fiscal struggles: its counterparties can immediately demand as much as $2.2 billion in accelerated principal, accrued interest and termination fees, New York-based Moody’s said in the report.

The company’s decision may raise borrowing costs in the $3.6 trillion municipal market: The city of 2.7 million was planning to issue about $383 million of bonds as soon as next week, data compiled by Bloomberg show. Some investors had already deemed its bonds speculative grade.

“While Chicago’s financial crisis is very real and at our doorsteps, today’s irresponsible decision by Moody’s to downgrade the city’s credit by two steps goes far beyond that reality,” Mayor Rahm Emanuel said in a statement.

Irresponsible to Tell the Truth

Apparently it's irresponsible to tell the truth: Chicago is broke and its pension system is insolvent.

The Chicago Board or Education (CBOE) is already on the hook for $600 billion in various termination fees when the CBOE debt was downgraded. Now the city itself is junk, and rightfully so.

If Emanuel disagrees, then what are his ideas to fix the problem?

Oh, I remember, Emanuel wants the state to bail out the CBOE.

Here's a question I keep asking: How is a state that has a $9 Billion Budget Deficit Hole going to bail out a single school district that is $1.5 billion in the hole?

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